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Treasury & Risk

Coming Soon: CEO Pay Ratio Disclosure

Nov 15, 2017

Early next spring, publicly traded U.S. corporations have to start reporting the ratio of their chief executive officer’s compensation to the median pay received by their employees. Companies worry that the disclosure, mandated by the Securities and Exchange Commission, could elicit negative reactions from employees or investors.

A recent survey suggests many are lagging in their preparations to begin disclosing the CEO pay ratio. Just 56% of companies have even calculated their CEO pay ratio, according to a survey of 276 executives conducted by Pearl Meyer, an executive compensation consulting company.

“People are still in the weeds on the data,” said Sharon Podstupka, a principal at Pearl Meyer.

In the Pearl Meyer survey, just 13% of company directors said the board has discussed disclosing the ratio in the company’s proxy statement, and just 11% of companies have talked about communicating the CEO pay ratio both internally and externally.

Earlier this year, the AFL-CIO reported that it had calculated the CEO pay ratio at S&P 500 companies at 347-to-1. The Pearl Meyer survey suggests that figure is overblown. Forty-two percent of the public companies it surveyed expect their CEO pay ratio to come in between 101-to-1 and 250-to-1. Just 18% expect a ratio that’s higher than 250-to-1.

Sharon Podstupka, Pearl Meyer, said revenue size is likely to play a role in companies’ ratios, with more than half (62%) of companies Pearl Meyer surveyed that had revenue of less than $300 million expecting their ratio to come in at 50-to-1 or lower, while companies with more than $3 billion in revenue expect their ratios to be much higher.

CEO pay ratios seem like information that would interest institutional investors, especially those that focus on executive compensation.

But Podstupka doesn’t see the ratios as a big factor this year. “While investors will look at the data, I don’t think we’re necessarily hearing that they’ll use it to influence say-on-pay votes,” she said. “In years to come, if this continues to roll out and we see troubling trends, then maybe.”

While public companies have been reporting their chief executive officers’ pay in their annual proxies for a while, there’s a sense that employees weren’t paying much attention. That could change when the CEO pay ratios roll out next year.

Pay inequality is a hot topic these days, Podstupka said, and “proxy statements are going to have a different level of visibility than they’ve ever had before. I don’t think we can underestimate the public’s curiosity.

“I think that the workforce reaction is probably the most worrisome and the one that I think companies should at the very least be prepared to react to,” she added.

Companies that are worried about their employees’ reactions should ensure the human resources department is prepared, Podstupka said.

“That may mean training people to have discussions” on the topic of pay, Podstupka said. “HR and managers are absolutely going to have to be comfortable with talking with people about all kinds of compensation issues. Companies are also going to need to be prepared to answer anticipated questions from the media, investors, potentially proxy advisory firms, and even potentially unions, depending on what their workforce looks like,” she said.

Podstupka said that while companies generally have “rigorous processes in place to ensure compensation is set in a fair way,” they often haven’t done a good job of explaining that. “This is an opportunity for companies to reinforce what their compensation governance practices are and to remind people there are things companies do to ensure pay is set fairly and people have opportunities to grow in their careers,” she said.